BoJ might become the first central bank in the world to introduce NGDP targeting

Abe advocates increased monetary easing to reverse more than a decade of falling prices and said he would consider revising a law guaranteeing the independence of the Bank of Japan. (8301) In an economic policy plan issued yesterday, the LDP said it would pursue policies to attain 3 percent nominal growth.

Talk about good news! Shinzo Abe of course is the leader of Japan’s main opposition party the Liberal Democratic Party (LDP). LDP is favourite to win the upcoming Japanese parliament elections – so soon Japan might have a Prime Minister who favours NGDP targeting.

So how could this be implemented? Well, Lars E. O. Svensson has a solution and I am pretty sure he would gladly accept the job if Abe offered him to become new Bank of Japan governor. After all he does not seem to happy with his colleagues at the Swedish Riksbank at the moment.

PS I would love to get in contact with any Japanese economist interested in NGDP targeting – please drop me a mail (lacsen@gmail.com)

PPS I can recommend vacation in Langkawi Malaysia – this is lunch time blogging in the shadow of the palms

8 Comments

regular

In Japan, there are a set of economists who are often called as “Rifureha”（リフレ派）, or reflationists. They persistently call for expansionary monetary policy involving inflation target or price level target in order to overcome deflationary recession in Japan. I think you may be interested in their thoughts. I know it’s none of my business, but let me introduce some of it.

Thank you Regular. That is extremely useful. Maybe I will try to write up something on the views of the “Rifureha” – it would be interesting to see how their thinking compares with Market Monetarist thinking.

regular

I’m looking forward to your comments about “Rifureha”. According to my personal judgement, “Rifureha” tends to emphasize the importance of “management of expectations” as policy prescription. Particularly, regime change in order to encourage higher inflation(or nominal income) expectation in present Japanese circumstance.（As Ryan Avent recently indicates （http://www.economist.com/blogs/freeexchange/2012/11/monetary-policy-0）, “Rifureha” also recognizes the necessity of regime change a la Sargent or Temin=Wigmore）. So I guess Market Monetarist and “Rifureha” have a lot something in common.

Benjamin Cole

Let us hope the Bank of Japan recognizes the error of its ways. That’s part one.

Part two is a lot harder. To change policy is to admit grievous error. Organizations do not like to do that.

That is one reason I am beginning to wonder if two of the all-time biggest economic shibboleths are bad ideas.

1. Central banks should be independent.
2. Monetizing debt is bad.

1. Central banks, when independent, never have to recognize making a mistake, and can ever so slowly, glacially, change if and when they want to. The economy suffers in the meantime. People, that is.

2. Japan monetized debt for five years straight 2001-6), and still suffered deflation. In the USA we have QE1 QE2 and now QE X, and we still have the Cleveland Fed index of inflationary expectations falling.

I think in Japan’s case, it’d be more appropriate to target NGDP per capita than NGDP. Given Japan’s shrinking population and labour force (IIRC dropping by a quarter by 2050), potential output would be shrinking as well. That means targetting NGDP might lead to too loose monetary policy. In fact it might turn out that BOJ’s policy settings over the past decade might actually be on the money, rather than too restrictive.

“remember our discussion by the pool?” I think that is a perfect way to start any reference to an economic issue;-)

But yeah you are right – I think there are pretty strong arguments for targeting NGDP per capita. That is especially the case for aging nations like Japan – or most European nations and China for that matter.